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CFGT-1: New Perspectives on Corporate Governance Theory
Managerial Short-Termism and Market Competition
Hong Kong University of Science and Technology
I develop a model to study managerial short-termism under market competition. Two publicly traded firms, each run by a manager, are competing for a new investment opportunity. Each manager privately observes her firm’s cost and makes an investment decision to maximize her expected compensation. I show that, when faced with competitive pressure, firms may deliberately induce their respective managers to behave myopically by tying their pay to short-term stock prices, thereby gaining a competitive advantage. The equilibrium constitutes a prisoner’s dilemma, as the managers’ behavior intensifies competition and erodes firms’ profits, but the fierce competition also improves the social welfare.
Ownership Structure, Reputation Crises and Recovery: Theory and Experiment
1Saïd Business School & Balliol College University of Oxford, UK; 2University of Texas at Dallas, United States of America; 3University of Iowa, United States of America
We model the repair of damaged corporate reputations through organizational structure reform. In a rational-choice framework our model explains the effects of the emergence and growth of the professional reputation-crisis management industry. The model produces two key conclusions: (a) Although, ex post, reputation repair can increase firm value, ex ante, the option to repair reputation dilutes the incentive to maintain reputation. (b) Separating ownership and control by delegating management to professionals can ameliorate this dilution. An experimental implementation of the model supports these conclusions and shows that they are robust to behavioral deviations from rational-choice behavior.
The Economics of Deferral and Clawback Requirements: An indirect tax approach to compensation regulation
1Erasmus University Rotterdam; 2Goethe University Frankfurt; 3Stockholm School of Economics
This paper analyzes the effects of mandatory deferral and clawback requirements for managerial compensation contracts in the financial sector. Moderate deferral requirements for bonus payouts induce bank shareholders to incentivize more risk management effort from the manager (and, hence, lower bank failure rates), whereas stringent deferral requirements will lead to higher instances of failure. Additional clawback requirements may prevent such backfiring. We provide conditions when compensation regulation alone can achieve second-best, and when it needs to be augmented by capital regulation. Our analysis exploits the general idea that any (regulatory) restriction on compensation contracts can be understood as an indirect Pigouvian tax levied on the principal for inducing a given action from the agent.
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